Buffett Offer Will Not Boost Ratings

Rumors circulating around the market suggest the possibility of bailout plans by a bank consortium as well as potential reinsurance contracts to aid struggling guarantors. Last week Warren Buffett even went as far as to make a public offer to reinsure $800 billion in municipal bonds that are currently insured by Ambac, MBIA and FGIC.

However, analysts said Buffett's latest public offer to reinsure these bonds will provide no such comfort to the monolines and might not supply a favorable boost to their ratings.

While a reinsurance deal might free up some capital, it is leaving the bond insurers with not only a less-diversified portfolio, but also with the riskiest assets still on their balance sheets.

"Certainly it appears Warren Buffett is only interested in skimming the cream and taking on exposure to the least risky segment of the bond insurers' business," said Kathleen Shanley, an analyst at Gimme Credit. "It's not clear that the rating agencies would regard [a less diversified portfolio] favorably."

Although details of the plan had not been released by press time, it seemed to be widely agreed that losing their municipal businesses would not appear to bode well for the monolines from a ratings perspective.

"[Financial guarantors] are still stuck with the structured finance book of business, which is where about 70% to 80% of their overall capital requirements lie," said Thomas Abruzzo, managing director at Fitch Ratings.

At the same time, from a qualitative perspective, not having a municipal book of business would also not be viewed favorably, Abruzzo said.

Steve Stelmach, vice president and financial guaranty analyst at Friedman, Billings, Ramsey & Co., agreed that the municipal reinsurance offer might not be enough to save the triple-A ratings. "We believe the offer, if accepted, could ultimately accelerate the process toward a potential run-off for the bond insurers," he said in a recent report.

Ambac has been downgraded to AA' from AAA' by Fitch, remains on review for a possible downgrade by Moody's Investors Service and is on credit watch with negative implications by Standard & Poor's. FGIC has been downgraded to AA' from AAA' by S&P, Moody's and Fitch. MBIA currently retains its triple-A rating from all three rating agencies but remains on negative watch.

A Muni Fix

Stelmach suggested that the proposal was more of a fix for the municipal bond market than the monoline shareholders.

Regulators might have a hand in pushing these deals closer to fruition, he said.

If a monoline's municipal bond book recieves assistance from Berkshire Hathaway Assurance, regulators might become more aggressive in protecting capital for the remaining structured finance and international businesses, locking up capital at the operating companies and preventing any dividends to the holding companies, Stelmach said.

And even if the bond insurers do not accept Berkshire's offer, Buffett may still have access to these bonds if the guarantors are downgraded and a regulatory solution is ultimately sought, Stelmach said. He expected that Berkshire would still be willing to reinsure the municipal bond book whether or not the holding company remains intact.

The Wrong Bait

Buffett is giving the guarantors 30 days to shop around for a better deal before the offer expires, but most predict the monolines wont bite. "Obviously the markets are comforted by the fact that someone who has the resources is giving consideration to support at least the municipal part of it," Abruzzo said. "But the monolines themselves are trying to lighten their own ships and work on their own plans that will fortify their positions without effectively giving away the franchise."

It would also be challenging for the guarantors to come back to wrapping municipal bonds in the future if they decide to relinquish this part of their businesses to Buffett, sources said.

As of press time, Ambac had been the only monoline to publicly reject the offer, although sources speculated that MBIA has also rejected the offer.

FGIC declined to comment. MBIA and Ambac did not return calls for comment.